Finding Land to Farm: Lease with Option to Buy

Today's blog is the fourth in a series on ways for beginning farmers to access land.

Lease with Option to Buy or Right of First Refusal

There are two ways a lease can improve ownership opportunities for a tenant farmer:

• With a “Purchase Option,” the owner and tenant pre-determine the purchase price, with a date for execution of the purchase. The tenant pays for this option up front, and the rent money can count toward an initial down payment.

• With a “Right of First Refusal” clause, the owner can only sell the land to a third party after the tenant has had a chance to “refuse,” by matching that third-party offer and making the purchase first. This helps ensure that an owner doesn’t sell the land “out from under” the tenant, but the tenant must be ready to act quickly.

Lease with Option to Buy

There are two ways a lease can improve ownership opportunities for a tenant farmer.

1) With a "first right of refusal" clause, the tenant gets to make the first offer prior to the owner listing the land for sale, at the seller's asking price.

2) With an "option agreement," owner and tenant pre-determine purchase price, with a required date of execution of purchase.  Tenant pays for this option up front and rent money someintes counts twoard initial downpayment.

Advantages

◊ The farmer is guaranteed that land wil lnot be "sold out from under" him or her.

◊ With an option in which the rent payment goes toward eventual purchase, the farmer builds equity toward ownership.

◊ When the purchase agreement is attached, farmer can plan for a known purchase price.

Disadvantages

◊ With first right of refusal, tenants hav elittle negotiating power—they can only exercise the right by agreeing to seller's terms.

◊ If the farmer is not financially ready when the property is put up for sale, or at the agreed-upon purchase date (option), the advantage and the rent equity are lost.

Tomorrow we'll look at another option.